How Fiscal and Economic Crises Prompted Retirement Reforms Abroad—and What They Reveal for US Social Security
Romina Boccia and Ivane Nachkebia
The United States is already experiencing the consequences of fiscal excess, driven in part by the growing imbalance in major entitlement programs, including Social Security. Federal interest costs now exceed spending on national defense, surpassing $1 trillion per year and projected to roughly double over the next decade as debt continues to rise. The government increasingly borrows just to pay the interest on that debt, diverting private savings away from productive investments and toward financing government consumption.
International experience suggests that fiscal crises often serve as catalysts for politically difficult but necessary retirement program reforms. Across advanced economies, rising debt burdens and economic shocks have forced governments to confront unsustainable retirement programs, often prompting benefit restraint and the adoption of automatic stabilizers to limit the need for future political intervention.
The lessons from these international reforms are especially relevant for the United States, as Social Security’s finances deteriorate and the costs of delay continue to mount.
The Consequences of Social Security’s Financial Deterioration
Social Security is a major contributor to the federal government’s growing fiscal imbalance. The program is running large and widening cash-flow shortfalls and is projected to add roughly $3.5 trillion in cumulative deficits before its trust fund is depleted in 2032. The program’s long-term (75-year) unfunded obligation (the difference between the present value of projected spending and revenues) is $28 trillion—approximately the size of the entire publicly held national debt.
Delaying reform until the 2032 deadline would make it more likely that lawmakers rely on debt-financed general revenue transfers to avert abrupt benefit cuts of $18,000 for a typical (medium-income) beneficiary couple or sudden tax increases of roughly $2,600 for the average (median) American worker (see chart below).
Congress still has an opportunity to act proactively and adopt reforms that allow for gradual, predictable adjustments. Delaying action all but guarantees a crisis-driven response—one that relies on additional borrowing and concentrates the costs on younger generations.
Fiscal and Economic Pressures as Catalysts for Retirement Program Reform
Other countries enacted politically sensitive retirement reforms when confronted with fiscal or economic pressures. A 2008 Government Accountability Office (GAO) report found that nearly every Organisation for Economic Co-operation and Development (OECD) country has reformed its retirement system since the 1990s, often in response to fiscal or economic crises. Reforms primarily focused on benefit reductions, and in some cases, implemented automatic mechanisms that adjust systems without the need for contentious political intervention. Commissions—often including outside experts—were also frequently involved in designing or advancing reforms.
Below, we summarize key takeaways for US Social Security reform from retirement reforms in Canada, Germany, New Zealand, and Sweden, explored in greater depth in our new book, Reimagining Social Security: Global Lessons for Retirement Policy Changes.
Canada reformed the Canada Pension Plan (CPP), a payroll-tax-financed, pay-as-you-go (PAYG) old-age program similar to Social Security, in the 1990s, when projections revealed the CPP’s long-term unsustainability amid mounting fiscal pressures, including a deficit of 5.1 percent of gross domestic product (GDP) and federal debt of 71 percent of GDP.
Sweden fundamentally restructured its retirement system after suffering the worst recession since the Great Depression, with government debt growing from 40 percent of GDP to 74 percent between 1990 and 1994, as spending reached 76 percent of GDP by 1995. The recession exposed the long-term unsustainability of Sweden’s primary old-age program and prompted Swedish lawmakers to adopt retirement reforms in 1998.
New Zealand’s experience followed a similar pattern. Unsustainable growth in old-age spending, combined with economic shocks in the 1970s, triggered a series of retirement reforms in the 1980s and 1990s, aimed at containing old-age spending.
Germany acted in response to severe demographic pressures and rising unemployment, prompting two major rounds of reforms in the 1990s and 2000s.
Focus on Reducing Unsustainable Benefits
As the GAO report highlights, most OECD countries primarily focused on containing benefit costs, including Germany, Sweden, and New Zealand.
German and Swedish lawmakers recognized that further payroll tax hikes—already near 20 percent in both countries—would be economically damaging. Germany slowed benefit growth, raised retirement ages, and introduced an automatic stabilizer in its Statutory Pension Insurance program (structurally similar to Social Security) that reduces benefit growth as demographics worsen.
Sweden replaced its defined-benefit (DB) program with a notional defined-contribution (NDC) Income Pension and mandatory individual accounts, while also replacing a universal basic benefit with a means-tested Guarantee Pension. Unlike DB programs like Social Security, NDC benefits more directly reflect one’s payroll tax contributions. But because NDC systems still operate on a PAYG basis, they remain vulnerable to demographic pressures. To address this, Sweden incorporated an automatic balancing mechanism into the Income Pension, which slows benefit growth when the system’s liabilities exceed its assets and restores balance without political intervention.
New Zealand reduced old-age spending from 8 percent of GDP in the early 1980s to 5 percent by the late 1990s. Reforms included reducing benefit levels in its flat-benefit program and gradually raising the retirement age.
While CPP reforms included slowing benefit growth, Canada also significantly raised payroll taxes and allowed the CPP to invest surpluses in the stock market.
Like Germany, Sweden, and New Zealand—and many OECD countries in the 1990s—US lawmakers should focus on limiting benefit costs in Social Security reform and avoid economically damaging payroll tax hikes that Americans are unwilling to pay.
Congress can achieve substantial long-term savings without cutting current benefit levels by simply slowing their growth over time. The Cato Institute’s recent Social Security survey shows that 58 percent of Americans favor this approach. For example, switching from wage indexing to price indexing initial benefits could eliminate 74 percent of Social Security’s long-term shortfall and generate cash-flow surpluses starting in 2078.
Use Automatic Stabilizers to Depoliticize Actuarial Adjustments
Retirement reform is politically difficult, which is why Canada, Germany, and Sweden built automatic stabilizers into their systems to limit the need for repeated political intervention.
As described above, Germany and Sweden have adopted mechanisms that slow benefit growth when demographic or financial pressures increase. Canada’s system also includes a similar feature: if the CPP faces long-term shortfalls and politicians fail to agree on a solution, an automatic mechanism will slow benefit growth and increase payroll taxes.
Sweden added a second stabilizer in its retirement system in 2022, which links the eligibility ages of all old-age programs to life expectancy increases, ensuring the system automatically adjusts to demographic pressures.
Once Congress overcomes the political barriers to Social Security reform, it should consider adopting similar automatic stabilizers to reduce the need for future political action for actuarial adjustments that reflect changes in economic and demographic conditions.
Establish a Fiscal Commission of Independent Experts
To adopt reforms, Congress first needs to overcome political gridlock that has paralyzed Social Security and broader entitlement reform for decades.
In Germany, New Zealand, and Sweden, commissions comprising outside experts and public officials played a crucial role in designing and implementing changes.
The United States should consider a similar approach and establish a commission tasked with restoring fiscal sustainability, including through entitlement reform. Importantly, past US commissions that included lawmakers have largely failed, suggesting that a commission composed entirely of independent experts would have a greater chance of success.
Support for such an approach is strong. A recent Cato survey reveals 71 percent of Americans favor such a commission. Modeled on the Base Realignment and Closure (BRAC) process, this structure would help insulate lawmakers from political backlash by shifting responsibility to independent experts, while expediting reform through silent approval with congressional fast-track authority to block any plan that legislators disapprove of.
Applying Global Reform Lessons to Social Security
The retirement reform experiences of Canada, Germany, New Zealand, and Sweden demonstrate that meaningful reform is possible—even in the face of significant political constraints.
Across these countries, fiscal and economic pressures prompted policymakers to confront unsustainable retirement systems—often by restraining benefit growth, adopting automatic stabilizers, and relying on expert commissions to advance politically difficult changes. The United States now faces similar pressures. By learning from these international examples, Congress can initiate reforms that protect both workers and vulnerable retirees while reducing the risks and costs associated with continued delay and fiscal irresponsibility.
We explored these international experiences and the path forward for Social Security at the launch of our book, Reimagining Social Security, with leading experts in retirement and fiscal policy.